The U.K. Financial Services Authority says hedge fund defaults pose little threat to the country’s financial system as their “footprint” within markets is “generally small.”

The FSA’s conclusions are based on the most recent iteration of its Hedge Fund Survey, which polled 50 investment managers with a combined US$390 billion AUM. The watchdog estimates the survey represents about 20% of global hedge fund industry AUM.

The survey finds that counterparty credit exposures to hedge funds “remain concentrated amongst a small number of banks,” but that those banks “appear to have tightened financing terms for hedge funds post-crisis, increasing their resilience to hedge fund defaults.” The average potential exposure of any one bank in the survey to any one hedge fund is US$50 million.

The FSA considers the gross value of hedge fund exposures relative to the size of markets and concludes “the footprint[s] of hedge funds captured in the HFS are generally low and have not changed significantly between the different surveys, suggesting these hedge funds are not the biggest category of players in most markets.”

The survey suggests hedge funds have a somewhat larger presence in the global convertible bond market (about 7%), and in the “much larger and more systemically important” interest rate and commodity derivative markets (about 4% and 6%, respectively).

On the issue of leverage, which the FSA considers a key to “accessing systemic risk,” the report finds its use had not changed significantly in aggregate compared to earlier reports.

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